May 21 (Reuters) - California's top state court on

Tuesday will consider a labor union's challenge to a ballot

measure allowing app-based services such as Uber ( UBER ) and

Lyft ( LYFT ) to classify drivers in the state as independent

contractors rather than as employees with more benefits.

The seven-member California Supreme Court will hear oral

arguments in San Francisco in a lawsuit by the Service Employees

International Union (SEIU) and four drivers who say the 2020

ballot measure known as Proposition 22 was unconstitutional.

Whether gig workers should be treated as employees or

contractors is a crucial issue for the industry, as employees

are entitled to the minimum wage, overtime pay, reimbursements

for expenses and other protections that do not extend to

independent contractors, who as a result can cost companies up

to 30% less, according to several studies.

Uber ( UBER ), Lyft ( LYFT ) and other app-based services spent more than $200

million on a campaign to pass Prop 22 and have said that without

it, the increased costs could force them to stop doing business

in the largest U.S. state.

A study released on Monday by researchers at the University

of California, Berkeley, found that most gig drivers in five

major U.S. cities - including Los Angeles and San Francisco -

earn significantly less than the minimum wage when full costs

are taken into account, including downtime. Drivers in

California were paid less than their counterparts in Boston,

Chicago and Seattle, according to the report.

Joseph Bryant, SEIU executive vice president, said the Prop

22 case is a key piece in a campaign to secure basic legal

protections for gig workers across the country and "reverse more

than a decade of exploitation."

"No matter the outcome, we will not be intimidated by

corporations' unconstitutional attempts to dictate law in

California," Bryant said in a statement.

The California Attorney General's office, which is defending

Prop. 22, declined to comment, deferring to its filings in the

case.

Protect App-Based Drivers and Services, an industry-backed

group that has intervened in the case on behalf of the state,

provided a statement from Stephanie Whitfield, an Instacart

driver who said the flexibility of her job has allowed her to

focus on her medical health while earning a living.

"It's not just about me - it's ensuring the people and

families I deliver to are able to continue to have access to the

services they rely on," Whitfield said.

NATIONWIDE BATTLE

California is just one front in a nationwide legal battle

over the proper classification of gig drivers and other contract

workers. Lawmakers in Minnesota passed a measure over the

weekend that would set a minimum wage of $1.28 per mile and 31

cents per minute for gig drivers, replacing a higher minimum

adopted by Minneapolis that spurred Uber ( UBER ) and Lyft ( LYFT ) to threaten to

cease operating in the city.

Earlier this month, the top court in Massachusetts heard

arguments over whether competing ballot proposals that would

redefine the relationship between app-based companies and

drivers in that state should be allowed to go before voters in

November. One proposal supported by industry groups mirrors Prop

22, while another would allow drivers to unionize.

And last week a trial kicked off in a lawsuit by the

Massachusetts attorney general accusing Uber ( UBER ) and Lyft ( LYFT ) of

unlawfully classifying their drivers as contractors to avoid

treating them as employees entitled to a minimum wage, overtime

and earned sick time.

The U.S. Department of Labor, meanwhile, is contending with

several legal challenges to a rule that would make it more

difficult for companies in many industries, including app-based

services, to treat workers as independent contractors.

Prop 22 was approved in November 2020 by nearly 60% of

voters in California. It exempts app-based drivers from a 2019

state law known as AB5 that narrowed the circumstances in which

many workers can be treated as contractors.

Instead, Prop 22 allows app-based transportation services to

classify drivers as independent contractors as long as they are

paid at least 120% of the minimum wage while passengers are in

the car and receive expense reimbursements and subsidies to pay

for health insurance.

A state judge in 2021 found that Prop 22 violated the state

constitution because it limited the legislature's power to

include gig drivers within the scope of California workers'

compensation law.

A mid-level appeals court last year disagreed and revived

the measure. That court said the California Constitution permits

the state's electorate, along with the legislature, to make

changes to the workers' compensation system.